Mortgage interest relief changes, the scrapping of the ‘wear and tear’ allowance and the introduction of the 3% stamp duty surcharge have hit landlords’ profits over the past few of years, which largely explains why so many people are exiting the buy-to-let market and in doing so reducing the supply of much needed private rented stock.
The government’s draconian tax changes have not just pushed a number of BTL landlords out of the PRS, but have also left prospective tenants in some parts of the country with little alternative but to bid against each other, pushing rents up in the process, as a result of the widening supply-demand imbalance.
In an effort to help boost investment in the buy-to-let sector, a petition calling on the government to reverse its Section 24 tax changes for BTL landlords, which removed their ability to claim mortgage interest rate against their tax liability, was launched last month.
Announced by George Osborne in 2015, the tax relief was replaced by a basic rate reduction from their income tax liability for their finance costs of 20%.
Simon Foster, who launched the petition, wants the government to reinstate the ability of landlords to set the full amount of mortgage interest against rental income, before tax is calculated.
His petition has reached 28,373 signatures so far and will run until 10 May 2023.
A spokesperson for the Ministry of Housing, Communities and Local Government has now responded to the petition, commenting: “The government will continue to set mortgage interest relief against rental income at the basic rate of tax. The government has a responsibility to make sure the income tax system is fair.
“The government recognises that the private rented sector plays an important role in the UK housing market and economy. However, the government also has a responsibility to make sure that the income tax system is fair. Under the old system, residential landlords got relief on their finance costs (including mortgage interest payments) at their marginal rate of income tax, which meant that higher rate taxpayers got a more generous tax relief than those on lower incomes.
“To address this, and make sure that all residential landlords are treated the same by the income tax system, the government phased in a set of reforms to restrict finance cost relief to the equivalent of the basic rate of income tax. The reforms mean that all residential landlords will now receive the same amount of relief. It also reduces the disparity in income tax treatment between homeowners and landlords.
“To minimise the impact on landlords who are affected, the Government chose to act in a proportionate and gradual way. It announced this change almost two years before its implementation. The restriction, introduced in April 2017, was phased in over four years to give landlords time to adjust to the changes.
“To be clear, these reforms do not mean that tax relief on mortgage interest has been abolished. Landlords are still able to claim an income tax reduction equivalent to basic rate tax relief on the finance costs of their rental property. Residential landlords also continue to be able to claim relief at their marginal rate of income tax on the day-to-day costs incurred in letting out a property, such as letting agent fees and replacing furniture.
“The Government understands that people, including those who rent property, are worried about the cost of living challenges ahead. That’s why decisive action has been taken to support households across the UK, whilst remaining fiscally responsible.”
At 100,000 signatures, this petition will be considered for debate in Parliament.
“The government will continue to set mortgage interest relief against rental income at the basic rate of tax. The government has a responsibility to make sure the income tax system is fair.”
But this tax system is the ONLY business rate which taxes turnover rather than profit. BTL is a business, not private income. I’m not sure they get that and is it fair??
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The petition / general complaint of S24 covers two separate issues.
The response, and general commentary in the media / from government, only covers the first element i.e. “to reinstate the ability of landlords to set the full amount of mortgage interest against rental income”.
This is, perhaps, debateable in regards to ‘fairness’.
It is the second part that is most definitely unfair i.e “…before tax is calculated“.
There are far too many landlords whose “income” now means they are taxed at 40% on some ‘earnings’ (as well as losing child benefits alongside other knock-on effects), despite the fact that is not their true level of earnings.
As interest rates rise (and thus so do mortgage costs) this becomes more noticeable, which is why it is only now the penny is dropping for many landlords.
Simplified example:
Bob has a salary of £40,000. He has two rental properties earning £22,000 rent, with deductible costs of £2,000 and mortgage interest of £15,000. He is a single father to two children.
Logic (and how every business in the land is taxed) dictates Bob’s net income is now £45,000 and he should be taxed accordingly. He pays £1,000 tax on his £5,000 landlord profit. A 20% marginal rate….this seems fair.
S24 reforms, however, now dictate Bob’s income is £60,000 and as such £10,000 is taxed at 40% before he gets the tax credit back on his mortgage interest (at 20%). He pays £3,000 tax on his £5,000 landlord profit. A 60% marginal rate…this seems unfair.
Worse still, he has to pay back all his child benefit (£1,885pa) having ‘earnt’ more than £50,000. He pays £4,885 tax on his £5,000 landlord profit. A 98% marginal rate….this seems very unfair.
You can argue this is an extreme example, or the figures have been massaged to create the effect, but this is the issue that is affecting many landlords who should be basic tax payers (and thus ‘are not affected by the changes’, according to the government) but no longer are, solely because of the Section 24 reforms.
There will also be affects known to higher earners, such as a similar creep into the additional tax payer rate / loss of personal allowance. I am not fortunate (unfortunate?) enough to fully comprehend the affects at this income level. Some will now even be paying more tax than their profits from being a landlord!
If all landlords could calculate the net marginal rate on their landlord profits using the old calculation versus now, I think that would be a more powerful demonstration to the unfairness of S24 reforms (and why many landlords are selling up, leading to a loss of rental stock and an increase in rents).
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All agents should send this link to all their landlords, without the necessary signatures this Petition will be of no use
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In other words, Parliament says, “Yah boo sucks”!
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